Arbitration is a method of dispute resolution in which disputes are submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the disputes. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court. Arbitrations are private in that third parties who are not a party to the arbitration agreement cannot attend any hearings or play any part in the arbitration proceedings. Arbitration as a dispute resolution technique closely resembles litigation. The object of arbitration is to obtain a fair resolution of disputes by an impartial third party without unnecessary expense or delay.
There are two forms of arbitration namely, ad hoc and institutional arbitration. Both forms have a separate mechanism for appointment of arbitrators. In ad hoc arbitrations, parties make their own arrangements for selection of arbitrators and for designation of rules, applicable law, procedures and administrative support. However, in an institutional arbitration, the arbitration agreement provides for an institution to administer the arbitral process as per the institutional rules on payment of administrative fees by the parties. The institution also allows the parties to select arbitrator(s) from the institution’s panel of arbitrators comprising experts drawn from various parts of the world.
The area where arbitration is most frequently encountered today is in international contracts. This is because where parties are from different countries they often agree to have the dispute determined in a neutral country rather than submit to the courts of the country of one of the parties.
Key features of arbitration
The essential feature of arbitration is that they are consensual, with the parties electing arbitration as the manner in which to resolve a dispute. The key features in arbitration include that:
- the process is voluntary and consensual, but adversarial;
- the parties agree to an arbitrator who is a neutral third party, and who may have speciality expertise or experience;
- the process leads to a binding decision by the arbitrator;
- the process is private, and not open to the general public, or the media, like a court hearing;
- the process will be confidential if the dispute resolution clause in the contract states that the arbitration proceedings and any information disclosed are confidential and can only be used for the purposes of the arbitration;
- the arbitration can be formal, like a trial in a court with evidence being given on oath and procedures similar to that involved by the court, or it can be informal (for example, when a decision is given based on agreed facts and documents);
- an arbitral award is widely recognised by the courts and internationally (through the New York Convention); and
- the awards are only subject to narrow grounds of appeal/challenge.
The limitation of arbitration is that it can take as long as standard court proceedings, and in some circumstances can cost more because the parties must pay the costs of the arbitrator and the physical venue of the arbitration. It should be noted that these days the distinction between litigation and arbitration is less apparent, particularly in terms of time and costs.
Who is an Arbitrator?
An arbitrator is a person selected by mutual consent of the parties or appointed by a third person or court, to settle the matters in controversy between the parties. A person appointed to adjudicate the difference is called an arbitrator. An arbitrator is a tribunal chosen by the consent of the parties. Any person who enjoys the confidence of the parties may be selected as an arbitrator. Every person is free to choose his own judge for the settlement of any matter in controversy, and the judge so chosen, if accepted by the opposite party, becomes an arbitrator. An arbitrator should be a person who stands indifferent between the parties. He should have no interest direct or remote in the subject-matter of the controversy or in the parties. Any person who is under any legal disability by virtue of statutory provision or by reason of public policy cannot act as an arbitrator.
After the amendment of Arbitration and Conciliation Act, 1996 in 2015 an arbitrator shall not be a related party as provided in the 7th schedule of the Arbitration Act.
Appointment of arbitrator by the parties
The parties may by agreement appoint whomsoever they please to arbitrate their dispute. They are free to determine the number of arbitrators. They may appoint a sole arbitrator or more than one subject to the condition that the number of arbitrators shall not be an even number. The parties may appoint an arbitrator in the following ways:
- An arbitrator may be named in the arbitration agreement, or
- He may not be named at all, or
- It may be agreed that the arbitrator shall be appointed by a third party who shall be named in the agreement.
Appointment of arbitrator by Courts
Where a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party or, in the case of an arbitration with three arbitrators, the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, on the request of a party, Court shall make the appointment of the arbitrator.
What disputes can be referred to arbitration?
Any dispute that can be decided by a civil court may be referred to arbitration. Generally, all disputes, involving private rights, can be referred to arbitration. Thus, disputes about property or money, or about the damages payable for breach of contract etc., can be referred to arbitration.
However, according to general practice, following matters are not referred to arbitration:
- Matrimonial matters, like divorce or restitution of conjugal rights;
- Matters relating to guardianship of a minor or other persons under disability;
- Testamentary matters, for example, questions about the validity of a will;
- Insolvency matters, such as adjudication of a person as an insolvent;
- Criminal proceedings;
- Questions relating to charities or charitable trusts;
- Matters falling within the purview of the Competition Act;
- Dissolution or winding up of a company;
- Any matter wherein exclusive jurisdiction of a Court or Tribunal is stipulated by statute.
Broadly, the reasons underlying this position is that matters involving morality, status and public policy cannot be referred to arbitration.
Arbitration in India
Arbitration was the first method of Alternative Dispute Resolution recognised by statutory law in India. Prior to 1996, the arbitration law of the country was governed by the Act of 1940. This Act was largely premised on mistrust of the arbitral process and afforded multiple opportunities to litigants to approach the court for intervention. Coupled with a
sluggish judicial system, this led to delays rendering arbitrations inefficient and unattractive.The Arbitration and Conciliation Act, 1996 (Arbitration Act) was enacted with an aim of, inter alia, consolidating and amending the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. The Arbitration Act is enacted on the lines of the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law which was adopted in order to have a universally uniform law for arbitral procedures.
The statement of objects and reasons of the Arbitration Act read as follows:
- To comprehensively cover international commercial arbitration and conciliation and also domestic arbitration and conciliation;
- To minimise the supervisory role of courts in the arbitral process;
- To provide that every final arbitral award is enforced in the same manner as if it were a decree of a court.
The main intent of the Arbitration Act was to provide speedy justice to the parties of a contract and to prevent any further delay in such cases. If contract disputes would be heard in a civil court, then it would involve lots of formalities which would give rise to delays and many cases would remain pending.
When Can Courts Interfere in the Arbitral Awards?
The Arbitration Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. The intervention of the court is envisaged in few circumstances only, like, in a case of fraud or bias by the arbitrators, violation of natural justice, etc. The provision aims at keeping the supervisory role of the court at the minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.
Circumstances When Arbitral Award May Be Set Aside
The arbitral award has been treated at par with the decree of a Court. The arbitral award is enforceable in the same manner as a decree of a civil court. This change has enabled reduction of litigation in some areas of arbitration. Before 1996, an award could not be executed in its own right unless a court ordered that award be filed and a decree issued in terms thereof. There is no provision for appeal against an arbitral award and it is final and binding between the parties. However, an aggrieved party may take recourse to the law court for setting aside the arbitration award on certain grounds specified in Section 34 of the Arbitration Act. Section 34 provides that an arbitral award may be set aside by a court on certain grounds specified therein. These grounds are:
- A party was in some incapacity;
- The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force or;
- The party making the application was not given proper notice of appointment of arbitrator or of the arbitral proceedings or was otherwise unable to present his case;
- The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters not submitted to arbitration;
- The composition of arbitral tribunal or the arbitration procedure was not in accordance with the agreement of parties unless such agreement was in conflict with a provision of Arbitration Act;
- The court finds the subject matter is not capable of settlement by arbitration;
- The arbitral award is in conflict with the public policy of India.
It has been two decades since the Arbitration Act was written into the statute books and courts have interpreted the provisions of the Act in such a way which defeats the main object of the legislation. Inconsistent jurisprudence has resulted in uncertainty and confusion about the state of the law and has gravely undermined the core principles on which the Arbitration Act is based. Though arbitration is meant to be an informal method of dispute resolution without the intervention of the court, in practice excessive interference by courts on trivial issues have made arbitration too technical and time-consuming. It has also given rise to concerns about India’s commitment to arbitration and severely dented its claim to be an attractive seat for international arbitration.
It is hoped that the after the amendments made in the Arbitration Act in 2015, which are meant to introduce fairness, speed and economy in the resolution of disputes through arbitration, the arbitration practice in India will be in conformity with international principles and reduce extensive judicial intervention in arbitration matters.